Doing the Deal

Computer Associates: Back In Services Hunt

By Nick Wakeman
Staff Writer

Computer Associates' acquisition of a small, Cleveland-based consulting company will expand its federal market reach as the software giant targets new business in electronic commerce and supply-chain management.

The Aug. 5 purchase of Realogic Inc. kicks off a renewed effort by Islandia, N.Y.-based Computer Associates to build a $1 billion-plus services unit through acquisitions and internal growth.

Computer Associates is looking to buy both government and commercial companies to quickly build a services business that will account for 30 percent of its revenues, said Chris Wagner, executive vice president of Computer Associates Global Professional Services unit. "We are not ruling out any companies as we go about our due diligence."

While Wagner would not elaborate on a timetable, analysts predicted Computer Associates could build a $1 billion unit in a year, given the company's history of 70 acquisitions over the past 22 years.

Privately held Realogic, which has 350 employees, had $42 million in 1997 revenue. Its clientele includes British Petroleum, Levi Strauss & Co., and Sealy Inc. and a meager but influential list of government customers, including the departments of Commerce and Energy.

Customers "are looking to get not only software tools, but support for those products from their technology providers," said Paul Dravis, an analyst with NationsBank/Montgomery Securities of San Francisco. So even firms like Oracle and PeopleSoft are building up professional services practices, he said.

Wagner said: "Our clients are asking Computer Associates to play a larger and larger services role."

For CA, the services market also is a lucrative one. The company sold about $2 billion worth of its framework software Unicenter TNG last year to global government and commercial markets, Wagner said. Related services needed to plan, design and implement that software are worth about $4 billion, he said.

CA's services business in the government today can be divided "between enterprise management and information management. It has grown year after year, and we expect it to continue to grow, especially with the combination of CA and Realogic," said Wagner, who declined to provide growth figures.

Realogic's core strengths are in network design and infrastructure implementation, wireless solutions, work group solutions, electronic commerce and prepackaged business solutions. The sale price of the company has not been disclosed.

Before Realogic, "we didn't have the skill set to get involved in terms of developing a project plan, looking at the infrastructure prior to rollout and doing some of the technical and functional design work," Wagner said.

The Realogic deal follows CA's failed February bid to buy Computer Sciences Corp. of El Segundo, Calif. At the time, Charles Wang, the chief executive officer of Computer Associates, pledged CA would take the steps needed to significantly expand its services business.

Overall, Computer Associates had about $4.7 billion in revenue during fiscal 1998. Historically, government revenues represent about 5 percent of total revenue.

Computer Associates' services business with the federal government pulled in about $60 million in fiscal year 1998, which ended March 31, according to Wagner. He could not provide a breakout of CA's commercial services revenues.



"We are like a Lamborgini
without any gasoline."


David Snyder, chairman and chief executive of Realogic Inc., commenting on his company's need for capital and its sale to Computer Associates.
David Snyder, chairman, president and chief executive of Realogic, said his company will "supplement very handily what CA does."

"An area we have experience in - and we see the federal market spending money on - is electronic commerce," said David Weyher, vice president of Realogic's mid-Atlantic region, based in Arlington, Va. Another area is supply chain management, he noted.

Earlier this year, Realogic built an online procurement system for the Department of Energy that linked 4,000 vendors to the agency, Weyher said. The system allows the agency to solicit and award bids electronically.

"Electronic business is going to be a very integral part of how the government is going to increase its productivity and be more responsive," he said.

Government agencies procure, inventory and distribute large amounts of products, but much of it is a paper-based system, Weyher said.

"There are a lot of technologies out in the marketplace that can help," he said. "So with all of CA's contracts and the ability to tap into deeper pockets, I think we can start to put a focus in the federal government around supply chain management.

"CA has a sizable federal presence, and I think immediately we are in the federal business," Weyher said. For instance, Realogic now has access to Computer Associates' contract vehicles such as NASA's Scientific and Engineering Workstation Procurement and the Navy's Super Mini Computer Program.

Realogic officials steered clear of the federal market because they knew it would be difficult for a small company to gain entry, he said. "But we always knew that we would [enter that market] when we were big enough."

The market research firm Input of Vienna, Va., expects the electronic commerce market in the federal government to grow from $243 million in 1997 to $309 million in 2002.

The growth is even more explosive in the state and local market. G2R Inc. of Mountain View, Calif., estimates the state and local market will soar from $660 million in 1998 to $5 billion in 2003.

Computer Associates is making its services push in order to keep ahead of its chief rival, Tivoli Systems Inc. of Austin, Texas, said Linda Saytes, an analyst with the market research firm Dataquest of San Jose, Calif. Tivoli has built a strong services business with the help of IBM Corp., which bought Tivoli in 1996.

"IBM has had one of the best services organizations since Noah built the ark," Saytes said.

Tivoli and Computer Associates are the leaders in the global $7.4 billion systems management software market, she said. Computer Associates had about 42 percent of the market in 1997, and Tivoli had 28 percent, according to Dataquest.

In the network infrastructure and framework market where Computer Associates and Tivoli play, the need for services is especially acute, Dravis said.

"The problems Computer Associates is trying to solve are among the hardest things to deal with, which is managing the disparate technologies that are supporting their business needs," he said.

The acquisition is a good move for Computer Associates, said James Mendelson, an analyst with Soundview Financial Group of Stamford, Conn.

"You could argue it is a baby step," he said. "This is not exactly a terribly large company, yet it is a reasonable size, so it represents a beginning. It gets them started."

Doing the Deal

Before linking up with Computer Associates, Realogic was headed toward an initial public offering, said David Snyder, chairman, president and chief executive of Realogic.

"We clearly were not infatuated with that process, but it was what we needed to fuel our growth." he said.

But then Snyder met with CA officials, and "we hit it off immediately," he said. The deal took about two months to complete.

Realogic also was entertaining offers from five other companies, Snyder said. But "I liked Computer Associates' strategy. It was very technology agnostic; it wasn't product-centric."


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